Turkey's economy tips into recession as lira crisis bites

ISTANBUL (Reuters) - Turkey’s economy contracted a sharper than expected 3.0 percent in the fourth quarter of 2018, its worst performance in nearly a decade and a clear sign that last year’s lira crisis has tipped it into recession.

FILE PHOTO: People wait in line to buy vegetables sold in a tent set up by the municipality in the Bayrampasa district of Istanbul, Turkey, February 11, 2019. REUTERS/Murad Sezer//File Photo

The drop in year-on-year GDP, underscored by expectations of more shrinkage through to mid-2019, represents a big step back for an emerging market long viewed as a star performer - and a potential stumbling block for President Tayyip Erdogan.

Turkey achieved growth of more than 7 percent in 2017 after years of a construction-fueled boom driven by cheap foreign capital.

But last year, the economy was battered by a 30 percent slide in the value of the lira brought on by concerns over a diplomatic row with Washington and the independence of the central bank.

The year-on-year GDP drop in the fourth quarter compared with a median forecast of 2.7 percent in a Reuters poll, and it was the worst performance since the second quarter of 2009. The lira initially eased slightly before recovering to 5.4386 against the dollar.

The economy grew 2.6 percent as a whole in 2018, a bit stronger than the poll forecast but also the weakest showing since 2009, the Turkish Statistical Institute data showed.

Fourth quarter GDP fell a seasonally and calendar-adjusted 2.4 percent from the previous quarter, when it shrank 1.6 percent.

For many, that meant Turkey entered a technical recession, often defined as consecutive drops in quarter-over-quarter growth.

The slowing momentum “is just a warning signal that the Turkish economy is going down a cliff,” said Nora Neuteboom, Netherlands-based economist at ABN Amro.

The economy’s abrupt slowdown in the second half of last year was in large part driven by a rift with Washington that led to U.S. tariffs and sanctions, and public pressure from Erdogan to cut borrowing costs that amplified investors’ worries over the central bank’s independence.

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As the lira crisis grew the bank raised its key interest rate to 24 percent in September, putting a brake on financial activity, and inflation peaked at a 15-year high of more than 25 percent in October.

“DEEPER AND LONGER” RECESSION

Erdogan is campaigning ahead of local elections on March 31 for mayors and municipal boards, and a deteriorating economy is eroding support for his AK Party, polls show.

“My sense is the recession will be deeper and longer than previously (thought) given the balance-sheet nature of (it),” said Timothy Ash of BlueBay Asset Management. “Any unorthodox response (by authorities, such as) early monetary policy easing... will make things much worse.”

The construction sector - long a beneficiary of Turkey’s credit-fueled building boom - contracted 8.7 percent year-on-year in the fourth quarter, the data showed, coupled with a 6.4 percent shrinkage of the industrial sector.

Consumption expenditure of households decreased by around 9 percent, pointing to a slowdown in domestic demand that has also sharply narrowed Turkey’s current account deficit.

The economy’s growth rate in the third quarter was raised to 1.8 percent from a previously reported 1.6 percent.

A senior Turkish economy official said this year-over-year measure was the “prominent method used” in Turkey in determining when a recession begins, suggesting no official acknowledgement would be made until after first quarter GDP data is released.

The Reuters poll of 19 economists expected the contraction to continue through the second quarter of 2019. The government, which in September cut its 2018 growth forecast to 3.8 percent from 5.5 percent, said improvement was around the corner.

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“The worst is behind (us)... The worst forecasts were not realized,” Finance Minister Berat Albayrak said on Twitter after the data was published. He predicted 2019 growth in line with the government’s forecast of 2.3 percent.

The Turkish government has attempted to boost domestic demand with tax cuts for some consumer products including vehicles and furniture, and has encouraged shops to offer discounts of at least 10 percent.

Reporting by Daren Butler and Ezi Erkoyun; Additional reporting by Behiye Selin Taner in Istanbul and Nevzat Devranoglu in Ankara; Editing by Jonathan Spicer and John Stonestreet